Niche opportunities and potential implications.
As funding continues to be tight for some sectors, we are seeing a huge growth in the private sector funding space. We explored three types of private sector funding that can assist clients unable to gain funding facilities with the major banking institutions.
Construction and Development Finance
As the major banks continue to tighten its lending criteria in the construction and development sector a growing funding gap has emerged for the significant pipeline of yet to commence construction and development projects. As such, we are seeing significant funding requests being placed with private investors, boutique financiers, and some foreign financial institutions.
While, considerable private capital is available, this funding is associated with interest rates usually starting at 10 percent per annum. Also, these facilities are often short-term—ranging from 1-12 months. Some financiers offer lower rates, but may only be available to those customers with the most bankable deals usually with very low LVRs (loan to value ratio) or additional property as collateral security.
Clients entering into a funding facility need to manage their expectations on these private funders' terms and weigh up whether to continue developing in this current cycle, or to postpone (if possible) when major bank funding becomes available again. If the customer wants to continue with the development in this current cycle, exposure to higher interest rates are likely, simply because there appears to be a lack of available funding facilities offering single digit rates of interest.
When assessing a private funding deal, we recommend prior to signing up to a private funding facility to:
- Engage a professional adviser experienced in understanding finance facility documents and its key terms.
- When seeking funding from private financiers ensure you understand the rate of interest and how it is charged. Sometimes, the interest charged is on the whole loan value irrespective of how much is drawn down at the time of charging.
- Review the exit clauses and the costs associated with refinancing or defaulting on the loan. With private funders the default rate is often higher (and substantially so in some instances).
Trade, debtor and Invoice Financing facilities
These facility types are used to assist a business with its working capital needs.
With each facility type a business can be protected from a working capital crunch caused by customers with long payment terms, or being slow payers.
Ironically, although there is a large market for working capital funding, by global standards we believe the trade financing sector is in its infancy in Australia and currently less than 10 percent of total receivables, or working capital financing is being funded through a trade receivables funding facility.
This industry is forecasted to continue growing, as larger customers of small business demand longer payment terms, which places an increasingly greater strain on the small business operator's working capital.
In understanding the funding facility terms, customers will have similar concerns around the rate of interest and exit clauses, and therefore engaging an experienced professional adviser is highly recommended.
Research and Development (R&D) Funding
This financing is specialised and focused purely on funding businesses operating in sectors that receive government R&D rebates. The finance facility is structured as a short-term loan that provides working capital ahead of the rebate being finalised. Once the rebate is received the facility is extinguished. An expert in R&D Tax usually prepares the R&D rebate and specialised tax advisers are necessary for such funding to be available. Under the Federal Government’s Research and Development Tax Incentive scheme, eligible businesses are entitled to a cash rebate of 45 cents in the dollar for all R&D expenditure incurred in Australia.
Again, in understanding the funding facility terms customers will have similar concerns around rate of interest and exit clauses, and engaging an experienced professional adviser is highly recommended.
Should you, or your client require access to these private lenders, Worrells has invested significant time in identifying various funders that suit borrowers' different needs. Please do not hesitate to call your local Worrells Partner.